Brexit and the funds industry, two years on

Brexit_arrowsIn the second of two pieces assessing the state of play for the asset management industry two years after UK’s momentous decision to leave the European Union on 23 June 2016, economists and fund managers describe what has been achieved so far in negotiations between the UK and the EU and what needs to be addressed in the coming months.

Dave Lafferty, chief market strategist at Natixis Investment Managers, says that, two years on from the Brexit referendum, “stunningly little progress” has been made in executing the UK’s withdrawal.

The lack of progress has in turn led to a lack of clarity on the part of UK firms, he fears.

“As the global economy gained steam in Q2 through Q4 last year in a more synchronised fashion, the UK seemed to be only major economy that was getting left behind,” he says.

“Firms have been opening offices and shifted workers into the EU, real estate prices are under pressure, and the initial competitive boost of sterling weakness has faded as the currency stabilised.

“Two years in, the economic fall-out of the referendum is clearly being felt. Moreover, with only a provisional agreement on the transition period, and virtually no progress on other important issues like financial services or the Irish border, the UK is at risk of stagnating even further.

“While the journey towards withdrawal remains in progress, some clear lessons have emerged in the negotiating process that might help Britain in the latter stages – or at least serve as a cautionary tale to the remaining EU members contemplating life outside the union.”

Meanwhile, Louise Dudley, portfolio manager at Hermes Global Equities, warns that the “lack of visibility on outcomes” makes it difficult for companies to plan proactively and this forces them to assume worst case scenarios.

“This could result in lower growth and therefore they are less attractive from an investment perspective. We remain under weight UK for these reasons – where we do have exposure it is mostly to companies earning their revenues outside the UK.

“UK businesses are starting to anticipate and factor in increased costs related to Brexit. For non-UK companies with offices here they will be looking to ensure they can continue to operate as efficiently as possible which may include being lured overseas.”

Rogier Quirijns, portfolio manager at Cohen & Steers, says that, two years on from the referendum, the impact of it is already being felt in several sectors, with rising costs and continued uncertainty contributing to a succession of business collapses and investment cutbacks.  

“Store closures are already impacting rents for traditional retail properties, a trend we do not anticipate reversing at any point soon,” he says.

“We believe a structural shift is coming, as both values and rents face downward pressure.

“The London office market has been fuelled by significant new supply entering the market over the last few years. However, we expect demand for these properties to slide as the Brexit process unfolds over the next 12–24 months.

“We have already seen several companies announce staff moves away from London since the 2016 vote.”

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